 Hi, my name's Leon Roe, currency trader and trading coach at Trading180.com and in this video I'm going to review the Euro dollar for the first quarter of 2023 and really get a look into how fundamentals affected price. And if you're new to the channel, a warm welcome to you and if you're obviously returning an equally warm welcome to you. And if you don't know, I am quite fundamentally driven. I use fundamentals for my directional bias and look for the technicals as timing. And if you are new to fundamentals or don't necessarily understand fundamentals or having a hard time in understanding the fundamentals and applying it to your technicals and really want to try to improve your trading. I have this video obviously that you're watching and several other videos and I will put links to the description and they should pop up in the top right hand side of the video. So whenever you see something pop up, that would be me just recommending a fundamental analysis video that I think you should watch. So let's get into it. Let's get into the fundamentals and look at the review. So just as a basic understanding and a reminder, I guess, is that there are three main, I guess, macroeconomic data points that we should look at when it comes to forex fundamentals and what really kind of moves price, at least over the medium to long term. And they are gross domestic product and inflation. And those two will have an effect on interest rates and what the central bank does with interest rates. And so looking at GDP first, typically, when you have gross domestic products and growing and expanding in the booming cycle of the economic cycle, it typically leads to currency appreciation, growth. And if you have contraction, then, you know, into leading into some sort of recession or bust slump phase of the economic cycle, that typically leads to currency devaluation or depreciation. Right. And so looking at inflation, inflation, central banks have a 2% target and a mandate, they are mandated to get inflation to the 2% target. Now, 2% inflation is actually an acceptable currency devaluation. It's seen as, you know, again, acceptable where it's not too hot, not too cold. The Goldilocks kind of the economy of inflation, if you get the reference, whereas if inflation goes above the 2%, then actually that is seen as unacceptable currency devaluation. So inflation rising is actually currency devaluation. And in fact, this should say, and I should have put this one below 2%, put that one out. Inflation, right. If inflation is below 2% and maybe trending away from the 2% target, so it's going to maybe one or zero and then it goes into the minus. In fact, that is unacceptable currency appreciation. So if inflation goes towards the negative towards zero, then in fact, the currency is appreciating. Right. Now, depending on what is going on with GDP and inflation will determine a central bank's decision on what they will do with interest rates. And there's the interest rate cycle and pretty much interest rates do go in cycles. And so inflation, inflation is above 2%, right. Central banks will typically tend to hike, right. And that leads to currency appreciation because what they want to do is actually counter, yeah, currency devaluation. So as you said, if inflation is above the 2% and trending away, then that is unacceptable currency devaluation. And to counter that, right, they need to hike rates so that and hiking rates has the effect of appreciating, creating demand for the currency, which create a currency appreciation to kind of stem currency devaluation caused by inflation. Now, if the central bank is on hold, then currencies, the currency, they accept the currency value, yeah. So they think to themselves that, yeah, we like the currency at this value, yeah. And the inflation, if inflation is below the 2%, then in fact, they will typically tend to cut interest rates and cutting interest rates has the effect or can have the effect of depreciating a currency because if inflation is below 2%, that is unacceptable currency appreciation. And so again, to counter the appreciation of a currency, they have to cut rates to try to depreciate the currency so that they can stop the currency appreciating too much. And also as well, it's well worth noting that if central banks hike too much, this will cause economic contraction. I'm not going to get into that in this video, but again, I have a video explaining that which I will put in the top right hand side of this video. So click on that maybe afterwards when you come back and maybe review this video. And so buy the rumour, sell the fact. Buying the rumour is what we do as fundamental traders and having a fundamental approach because that's where the money is made. It's secondary whether the actual fact comes to pass, right? But the money is made in buying the rumour. We need to get ahead of the curve. And so that is really what the point is with fundamental analysis. It's getting ahead of everybody else trying to get ahead of these technical traders who have no idea what's going on and buying at bargain prices and looking where something is expensive as well as a bargain or a cheap or a discount. And understanding that when things are changing in the future, then in fact, currently, whatever price of the exchange rate is of a currency pair, in fact, that is probably cheap or it might be expensive, again, depending on what happens with gross domestic product, inflation, and interest rates. So it's all about buying the rumour. The fact, whether it comes true or not, is secondary. And so let's look at central bank policy differentials because that's what we're ultimately trading in currency land. And Euro dollar, obviously, the most traded currency in forex. And so when we're looking at GDP, inflation and interest rates, we're comparing those, you know, Europe's data with the US data and seeing where the differentials are. Yeah. So if one central bank, for example, is hawkish, right, very hawkish, hawkish meaning that they are likely to hike interest rates compared to a currency that is not as hawkish or maybe a bit dovish, which means that they may want to either hold or cut rates, then there's a differential there, right? Because we know that hiking interest rates appreciates a currency, cutting rates devalues the currency. So the biggest kind of divergence you can get is when one current one central bank is hiking rates and another is cutting, but that doesn't necessarily happen all the time and every day. But, you know, what we're looking for is differences as to why one central bank is likely to be a bit more aggressive in their hiking of rates currently compared to, for example, another or why one central bank is likely to, for example, continue hiking and leading their hiking in terms of the other central banks, say central bank B is likely to hold first, kind of like a leading and lagging dynamic, but we'll get into that maybe in another video. Anyways, let's look at the differences between the euro and the dollar in January, February and March. And so what was happening in Europe in January? So euro, according to Bloomberg and an article in Bloomberg, traders were wagering that the ECB will raise rates by another thought of 140 basis points. The euro's gains also reflect a certain of optimism over Europe's economic outlook given lower gas prices in China's reopening, which is seen as a boon for the trade. So to give us a bit of context, what was happening was in November, December, it was expected that the Europe would go into a recession because of higher gas prices. This is due to the Ukraine and Russia tensions in the war that was going on. And so Europe were expected to go into a recession, but due to a some really warm weather and natural gas prices actually coming down, it helped the economy. And so the economy actually didn't go into a recession, actually avoided the recession, it started to grow a little bit. And although inflation was high, it helped the central bank by them actually being able to high crates because if they went into a recession, then hiking rates in the recession actually makes things a lot worse. And so, yeah, inflation, although it was rising, Europe had a dodged a bit of a bullet in terms of avoiding a recession. And so the traders were placing bets that in fact, with rising inflation and a decent economy, that Europe were able to hike a lot more, so about 140 basis points, whereas in the US, at the time, this is from the same article, only around 60 basis points are further fed tightening, tightening meaning hiking is priced for the rest of 2023. So you can see that the European Central Bank was being seen as being way more hawkish than the Federal Reserve were. So markets are now leaning towards a 25 basis point height, rate rise from the Fed come February, the smallest in nearly a year. And so, again, you can see the hawkishness between the two, the European Central Bank was seen as being way more hawkish, and the Fed actually were seen as, again, less hawkish, slightly dovish. So what happened on the charts in January? Let's look at January. And so this is from the beginning of 2023 at the beginning, and we can look at until February the 1st. And again, what was expected happened. So in our private mentoring group, this called group, we've been long, and I've said I've been long since the end of December, right at the beginning of January, somewhere around there, and we had a long bias on the euro dollar or getting on the long on the euro. And so, you know, this is basically is, you know, what played out. And so many of the traders will attest to this, mainly made decent amount. And so, yeah, for the whole of January had a long bias, right, getting in long on that euro dollar. And that's pretty much what played out. So let's go to February euro dollars. So Europe, European Central Bank may need to deliver another half point interest rate increase after a planned hike of that size at next month's meeting, according to the Governor Council member class not. And so, I think in February, they did hike by 50 basis points. And the the consensus was that they probably may need another 50 basis point hike in order to try to combat inflation. But there was a shift, in fact, with the Federal Reserve, right? Whereas, well, in this month, we had the Federal Reserve officials could shed light on how many policymakers saw the case for a larger interest rate increase at their last meeting, whether they anticipated the need to take rates higher than previously thought contain persistently high inflation. And so remember the previous month, we saw that the market was expecting probably around about 60 basis points for for the rest of 2023. What would happen was is that inflation was was a bit sticky. And so persistently high. And so, to get again inflation down, you know, the the market kind of changed its view or slightly amended its view to think that or the Federal Reserve did as well was that the rumor was was that the they may actually hike more than expected. Yeah. And so with that being said, the market had to price that in so though the euro was still hawkish, in fact, there was a, you know, a much more hawkish sentiment to the dollar, right, which then should mean that the the dollar would have to be revalued and appreciate a bit more against the dollar, right? Because that there was a change in sentiment. And if you go to February, so February 1st to March the 1st, this is basically what you saw, right? You saw prices start to, you know, make lower highs, lower lows as the rumor of a 50 basis point hike was coming into play. Yeah. And again, it was a rumor because it actually did not happen. So I think they had by 25 basis points, but the rumor was that they may hike more than expected. And so that had to priced in to the market, whereas the month before, they were seen as maybe being a bit dovish. Yeah. So that is pretty much what had happened during the charts on February now into March. So Euro money markets, money markets traders briefly priced in a 4% ECB terminal rate in the wake of the releases, which would exceed the peak in borrowing costs at the turn of the century that compared to a 3.5% expected earlier this year with traders now betting the ECB will keep raising rates through February 2024. And so, in fact, that was very, very hawkish for the Euro in the market was expecting even more rate hikes than they had previously expected. Sorry, the month before. And so again, just similar to what happened with the US in February, where there was a bit of a change in hawkishness. In fact, money markets had priced in and higher terminal interest rate. And so, you know, from to four from 3.5%. And so that was quite hawkish for the Euro, whereas in Europe, the statement is, it says, now we are starting to fill those long and variable lags with, sorry, with which monetary policy works, Bellarina Uruchi, chief US economist at T-Row Price Associates told Bloomberg Television on Friday, the first sign of that is, I think, what we are seeing with Silicon Valley Bank here, lots of businesses and banks, we are going to find this year aren't able to operate at these higher interest rates. So again, to give this a bit more context, we all know what we should know all about, you know, Silicon Valley Bank collapsing and other banks, I think, Silver Gate Bank or something like that. And there were banks in the US that were failing. And this was brought on by higher interest rates. And so one of the factors was high interest rates. So let's go back to when I pretty much was talking about hiking too much causes economic contraction. So borrowing and lending costs were obviously affecting the banks as it was going higher, as the Federal Reserve were hiking, and that was just one of the effects of hiking interest rates on the economy and on, you know, companies and banks. And so the sentiment really was that how can the Federal Reserve continue to be very hawkish and continue to hike if there may be more banks in problems. And yes, there were European banks, you know, that were in problems. I think it was Deutsche Bank had a bit of a bail in now as well. But it was seen that the US banks were in a lot more problems than European banks. And so when you have, you know, a bit of a credit crunch and a credit crisis where the US is most affected, it means that if, you know, there's credit crunch, that would mean a contraction in the economy. And a contraction in the economy may mean obviously a recession sooner rather than later. And again, hiking in that environment is not prudent, because if you keep hiking, you're going to exacerbate the potential for a recession, right? You're bringing the recession closer to you. And so the, you know, Europe, while they had, you know, the quite hawkish bias, which did, you know, later change to be a bit more cautious as well alongside the Federal Reserve, there was still a hawkishness or they will still and still are more hawkish than the Federal Reserve currently in terms of interest rate hikes. So what happened during March? And this played out again, a more hawkish European central bank. There was a bit of a bit of a wobble, but ultimately we ended up going higher. And in fact, sorry, I haven't actually should actually cancel this one sec. Sorry. Right. So here we are. We used to do year to date. Yeah. So here we are in March. Yep. So from here to here in March, we had prices really kind of move around 400 pips from the low, nice buying opportunities at these lows before prices went to the upside in March. And so, you know, we're seeing the divergence between both central banks again play out into April and into May as nothing's really changed per se. The European central bank are still more hawkish than the Federal Reserve and are expected to hike more than the Federal Reserve. And you're seeing obviously prices drift higher. And so with that, doing a bit of a fundamental review, looking at the actual data, looking at GDP, we can see that the US is are the blue columns and you've got the European growth rate as represented by the dots. And so we can see that from January into April, we've seen a slight decline in terms of GDP growth rate for the US. But in fact, in Europe, we had a bit of a bit of growth, right? Prices have gone to the upside. Yeah. The number is lower in terms of growth rate. But remember that the European central bank was supposed to go into a recession. And the fact that they avoided recession to negative quarters of growth, right? They avoided that. And so that was seen as an absolute positive for Europe. Yeah. So we've had a bit of a divergence there where we had one since one economy contracting and one actually growing, although be it quite slightly. And then we've got inflation rate. And so the US inflation rate again has come down to around 5% here on this axis. On the right hand side, we've got the European inflation, which is actually around 7%. And you can see it slightly ticked up as well, the latest inflation data. So with that being said, let me go back. So inflation obviously for the US is coming down, whereas although it's come down recently for the European central bank, it's A, a lot higher than the US and B. It's on the upturn slightly. So it looks like again, the European central bank are likely to be a lot more hawkish than the US. And we can see what's happened with interest rates since the beginning of the year. And you can see in February the European central bank hiked by 50 basis points, whereas the Federal Reserve actually hiked by 25 basis points. And then you had another 50 basis point hike by the European central bank. And then you had only a 25 basis point hike from March into April. And so whereas the European central bank has hiked by 1% or 100 basis points, the Federal Reserve only hiked by 50 basis points or 0.5%. So again, very hawkish from the European central bank. And so again, seeing that on price, it's no wonder you're seeing prices grind a lot higher. And towards the end of the year, what's expected is that the European euro of dollars should reach at least 115. So let's see if that actually comes to fruition. Right. Anyways, just some notes. It's things you must be aware of. So data must support the narrative. You must have the data support your trade idea. Now we're dealing with trade probabilities, right? There are no certainties and no one has a crystal ball. And so when you've developed a trade idea and you've got a trade idea, you can continue to kind of hold the trade or have that bias if, for example, let's say the European central bank hiking rates, they want to hike rates. And let's say the data support in that narrative would be a continued rising inflation and supporting that may be a decent economy, right? Economy still growing. That data will support the European central bank hiking, right? Now, if Europe are going to go into a deep recession, then it's going to be difficult for the European central bank to hike in that environment. And so you can't start to say, all right, then well, I'm just going to start buying the European central bank if the data doesn't support the narrative, inflation starts coming down. Then although, yes, in this day, currently today, the European central bank are more hawkish than the Federal Reserve that can change if inflation starts to drop like a stone, then the European central bank are going to say, well, what's the point in hiking if inflation is coming down naturally and normally, there's no need to hike. And so data must support the trade idea narrative. And there are, again, no probabilities, no certainties in trading. So then the probabilities, we deal with the probabilities and there are no certainties in trading and think bigger picture. So there's lots of data points that can get you confused and distracted. The best thing is to think about the bigger picture, observe the higher time frames and look at the daily and weekly time frames, try not to get drawn into every single lower time frame, every five minute, you know, support or supply zone or trade setup, because you can have situations where you might get a pullback, right? Now, in March, you had a nice move from this high to when it's low to this high, right? Now, there was a pullback of around 200 pips. Yeah, this pullback on the daily was around 200 pips, something like that. From that high to that low, 217 pips. And so if you were to zoom in on this, on to like, you know, some sort of 15 or five minute chart, a lot of traders will try to, you know, we'll say, oh, well, you know what, Leon said that, you know, I should be bullish. I've done my fundamental analysis and I want to be bullish on this, you know, this currency pair. Now, yes, you're making the right choice in terms of being, you know, your directional bias, but ultimately, you still have to understand that there's, there's value, right? You're buying at highs. Don't buy at highs. If this is a move that has gone, you know, several hundred pips from this low to this high, in fact, what you should be doing is looking for discounts. Yeah, discounts. And one of the discounts I look for is fair value. And so if you go back to, if I go back to the day time for NCHAR, between this high and this low, yeah, 50% of that would represent fair value. So what happens is that you can see here, that price came down to fair value, right? And that was really the area that you probably now want to start to look for a trade sell. If you're looking for every five minute, 10 minute trade sell, you could be right about your direction, but because you're buying at highs and the, you know, the institutions want to buy for discounts, pullbacks, you know, 200 pips might seem like a trend on a five minute timeframe, but it's really just a pullback and if you understand the fundamental bias, just really kind of zoom out and look at where you are in context of, you know, where expensive is, where cheap is, and don't FOMO in at highs, right? Don't FOMO in in these areas, wait for the pullback, wait for a decent price pullback fair value, and then look for potential loan trades, right? And that's not necessarily me telling you, you know, a strategy or anything like that, but just giving you the context of why you should kind of zoom out and look at the higher timeframe, the bigger timeframes and give yourself a bit of context. Then once prices pull back into a nice, you know, zone and maybe support resistance or supplies, you know, demand zone that you want to look to get involved in, then maybe go down into the lower timeframe, start to look for cementries or whatever your setup may be. Yeah, so look at daily, weekly timeframes for context. Directional bias really doesn't change too often, and so, you know, I've been long on the euro pretty much now since the beginning of the year, as I mentioned before, and so that's what I'm releasing this in, I'm recording this actually in May, so it's been five months since I've been long on the euro and it hasn't really changed at all. Actually, it hasn't changed at all. And so directional bias, once you get a good trade idea, doesn't necessarily change from week to week. Some traders will say, oh, well, what am I going to be going to be long this week or short this week? If you have a good trade idea, you know, you can be in a trade for months. And again, I've created a video, I think it was like maybe a couple of years ago, a few years ago, where I was detailing how I was short on the euro dollar for a whole year. In fact, I was short for over a year, but I just made a video similar to this, where I detail month to month, you know, my euro dollar short trades and my bias and the reasons why, and again, I'll put that in the link in the top right hand side. And so directional bias doesn't change too often. It's not a week to week thing. You can have a directional bias for a good few months, if not longer, once you once the data does support that narrative. And yeah, that's pretty much it. So if you're still around watching this video, thank you for watching to the end and also as well. For the next video, I thought I'll put it out there. If you've got, you know, for the second quarter video, I'll do these every quarter. So if you want me to analyze a pair, just suggest it in the, in the chat below, if you're watching this on YouTube and the pair with the most, you know, likes or the most suggested pair, I'll do a similar analysis to this video or the same analysis to this video on that currency pair. So it could be pound dollar, it could be pound yen, it could be Aussie CAD, you know, just whatever you want. But again, the most popular pair, the most suggested pair, I will do a second quarter analysis on that for you guys. And yeah, finally, there is mentoring available. You know, we can get access to the private discord community where you can take your fundamental analysis really to the next level and go to trading180.com. I don't really have the mentoring open 24-7. I do have periods where I have mentoring as I like to keep the group small and really kind of focus on smaller groups. And so whenever the next opening is, it'll be on the website for you to join then. So guys, take care. I hope you enjoyed the video. Suggest a pair that you want me to look back on and give you the analysis on and again, the most recommended pair is what I would do. Anyways, guys, take care. All the best. Speak to you soon.